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RIL: Weakening fundamentals

Oct 31, 2001

At first glance, Reliance Industries Ltd. (RIL) seems to have reported a sharp drop in net sales of 26.1%. However, YoY effect is due to the inclusion of merchant sales in last year's numbers. Till last fiscal, RIL was exporting petroleum products for Reliance Petroleum Ltd. (RPL).

(Rs m) 2QFY01 2QFY02 Change 1HFY01 1HFY02 Change
Net Sales 76,840 56,790 -26.1% 136,960 114,350 -16.5%
Other Income 760 1,680 121.1% 1,540 2,950 91.6%
Expenditure 63,520 44,330 -30.2% 112,070 90,140 -19.6%
Operating Profit (EBDIT) 13,320 12,460 -6.5% 24,890 24,210 -2.7%
Operating Profit Margin (%) 17.3% 21.9%   18.2% 21.2%  
Interest 3,330 2,550 -23.4% 6,310 5,120 -18.9%
Depreciation 3,810 4,220 10.8% 7,470 8,180 9.5%
Profit before Tax 6,940 7,370 6.2% 12,650 13,860 9.6%
Tax 340 350 2.9% 620 660 6.5%
Profit after Tax/(Loss) 6,600 7,020 6.4% 12,030 13,200 9.7%
Net profit margin (%) 8.6% 12.4%   8.8% 11.5%  
No. of Shares (eoy) 1,054 1,054   1,054 1,054  
Diluted Earnings per share* 25.1 26.6   22.8 25.1  
P/E Ratio   9.5     10.2  
*(annualised)            

Merchant sales in 2QFY01 were Rs 16,730 m. Adjusting for merchant exports, net sales from core business has declined by 5.5% YoY. This is below our expectation of 2% growth. That said, we had mentioned the possibility of downside risk being greater on topline for 2QFY02, as volumes could not have entirely compensated for the erosion in realisations. In fact, the company has reported a 2% decline in sale volumes for 1HFY02. On the other hand production increased by 9.1% but inventory value has declined YoY. This could indicate a sharp drop in final product realisations.

Similar to net sales, operating expenses of the previous period include cost of merchant exports, which is leading to a large YoY effect. Adjusting for the same, operating expenses have decreased by an estimated 5.3% and 0.4% respectively for the quarter and half year ended September '01. Lower costs are largely due to raw material expenses, which have declined by 13.6% YoY for the concerned quarter. With a downturn in the global and domestic economy average naphtha prices declined for the concerned quarter by 8% YoY. However, any relief from lower naphtha prices was denied with a larger drop in final product prices. Therefore, although operating margins are showing an increase, core business margins (petrochemicals) are estimated to have marginally declined by 30 basis points for 2QFY02 and 40 basis points for 1HFY02.

This is the third consecutive quarter the company has reported a YoY drop in interest expense. This is largely due to the ongoing capital cost reduction exercise. RIL continues to refinance high cost debt with low cost borrowings. Also, the company has re-paid a part of its long-term debts. Depreciation costs have increased largely due to the change in method of depreciation from straight line to written down value method and revaluation of assets. Depreciation costs for 2QFY01 have been re-stated higher by Rs 410 m on account of change in method adopted during FY01. Consequently, pre-tax profits for the period are lower by the same amount.

Other income over the concerned periods has exhibited a dramatic increase. This is primarily due to dividends earned from Reliance Petroleum Ltd. (RPL)., which are being accounted for on a pro-rata basis over the four quarters. Other income also includes interest earned on bonds issued by Reliance Infocom.

At Rs 254 the RIL scrip is trading on a multiple of 10.2x 1HFY02 annualised earnings. Over the past six months valuations have retreated to reflect fundamentals. On a consolidated basis, the company earns Rs 33.6 per share.


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